Will the better capacity utilization rates in India have a positive impact on Q4 results for FY22?

Before we move to the impact on the fourth quarter results, let us also look at why higher capacity utilization matters. There are 2 reasons. Firstly, it indicates fixed costs are better absorbed with the same capacity levels. Secondly, better capacity utilization means the efficiency ratios like asset turnover and inventory turnover improve meaningfully. These efficiency ratios boost profitability of companies in tough times. The big news is the return to pre-COVID levels hinted by IIP and core sector, is ratified by company level data points.

Let me now dwell on the impact on the Q4 results. This data point on capacity utilization becomes critical in the light of the challenges that many sectors like autos, cement, FMCG, paints and chemicals have faced due to margin pressures due to rising input costs. That will be partially offset by higher capacity utilization. In Mar-22 quarter, we will see the positive spill-off of better capacity utilization. Add the revival in contact-intensive sectors like hotels, transport, tourism, travel and trade and you have a best case scenario for Q4 results.